Can I depreciate the cost of nut trees the rental farmer purchases to replace dead trees with if he has already subtracted their cost off my crop check already?

[teaman1]

I have a farm of nut trees I rent to a farmer. Some have of the trees have died. The farmer at my approval, purchased new trees and planted them where the dead trees were taken out. He subtracted the cost of the trees from my portion of the crop check already. He says they have already been expensed and that I can't depreciate them. I believe they are an asset that can be depreciated for 10 yrs. 

What is correct story? Can I depreciate the trees newly planted even though the cost was taken out of my crop check?

[Carl]

Technically, you are the one who purchased them. So I don't see why not, since you own those trees. @Cattlerancher what say you?

[Cattlerancher · Accepted solution]

He may have expensed them but you paid for them by receiving that much less of your agreed share of the crop, so you reimbursed him for the trees. Keep good records to show you reimbursed him. You can depreciate the trees as we last spoke in our previous question but if you are the land lord receiving a share of the crop be sure to use the Farm Rental Income (form 4835) section. It allows for depreciation as well.

[teaman1]

@Cattlerancher Thank you for your responses!  I spoke to my farmer (renter of the crop) and he still claims by reducing my crop portion check it's already expensed (written off) and can't be depreciated. My 1099-MISC reported income shows the reduced crop share check amount (after my cost of the trees was taken out). So it does seem that trying to depreciate the new trees cost is trying to reduce my taxable income from this farm twice, once in a lower than reality income amount and again on the depreciation form. It seems he is the one who goofed and should be showing/giving my full portion of crop share, then asking for a check to purchase the trees and pay for the digging out dead /replanting new trees. Then I could depreciate the tree cost and expense the labor charges for digging/replanting. But that's just how I see it. I'm not a tax expert. Please let me know what is the correct way to handle this.

[Cattlerancher]

Actually, he is claiming extra income by paying you "less than your agreed share of the crop". His extra income offsets his deduction of the trees. (Added 2/12/17) In other words, by deducting it off your crop share, he is being reimbursed by you. You are still paying for the new trees.

[teaman1]

@Cattlerancher I'm not really concerned with his taxes, just trying to determine how to report this. The original agreement formula was Crop %share Amt - x/acre core expense (for sprays/fertilizer). One year he did ask for a check to him for purchase of the new needed replacement trees and replanting (he lumps the tree cost and replanting fee together per tree). But all the other years he has replanted, he just deducts it off the crop share amt as he must figure it saves having to have me send him a check. As I see it, while the cash flow is the same, the amount shown on the 1099-MISC is what the gov. sees as farm income and differs depending on how it's filled out.

So are you standing by your same answer above in light of this additional info? I can depreciate and if audited, claim he didn't put the correct amount on the 1099-MISC or stop depreciating and let the trees essentially be written off as an expense (which to me seems incorrectly handled.)

[teaman1]

@Cattlerancher are you willing to respond to my comment above and confirm if you still think your original answer is correct in light of my added details in my comment above?

[Cattlerancher]

Oh my gosh, I'm sorry I did not see your comment of two days ago. Yes, I'm standing by my same answer. I have also added to my last comment.

[teaman1]

Thanks for your addition and clarification!

[Cattlerancher]

"So are you standing by your same answer above in light of this additional info? I can depreciate and if audited, claim he didn't put the correct amount on the 1099-MISC or stop depreciating and let the trees essentially be written off as an expense (which to me seems incorrectly handled.) "
In response to the above; Lets be sure we are on the same page. If he reported your crop share rental income on a 1099-MISC, you need to report 100% of that amount. Anything other would draw a red flag with the IRS. I am suggesting you expense or depreciate the trees (as you are the owner) using the cost basis of the amount you reimbursed him for. (That's the amount he reduced your share of the crop check by)

[teaman1]

@Cattlerancher Yes, I am reporting as income the figure the farmer provided on the 1099-MISC which is an amount after he took out the cost of the trees from the crop share basis. Based on your response I can also depreciate the cost of the trees over 10 yrs based on that cost he removed from my share prior to the check being sent to me.

[Cattlerancher]

Yes, that is correct. Keep records to show what the amount you would have received if you received your full crop share. In other words, if you had no reduction in your check. This is your "proof of purchase". Your "receipt of purchase". It's a bit backwards but the fact is you paid for the trees~~~